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Inventories: Measurement

Inventories: Measurement. 8. Those assets that a company:. Inventory. 1. Intends to sell in the normal course of business. 2. Has in production (work in process) for future sale. 3. Uses currently in the production of goods to be sold (raw materials). Merchandise Inventory.

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Inventories: Measurement

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  1. Inventories:Measurement 8

  2. Those assets that a company: Inventory 1. Intends to sell in the normal course of business. 2. Has in production (work in process) for future sale. 3. Uses currently in the production of goods to be sold (raw materials).

  3. Merchandise Inventory Manufacturing Inventory Goods acquired for resale • Raw Materials • Work-in-Process • Finished Goods Types of Inventories Types of Inventory

  4. Inventory Cost Flows RawMaterials FinishedGoods Work inProcess $XX (7) $XX (4) $XX (1) $XX $XX $XX (8) DirectLabor Cost of GoodSold $XX (5) (2) $XX ManufacturingOverhead $XX $XX (6) (3) $XX • Raw materials purchased • Direct labor incurred • Manufacturing overhead incurred • Raw materials used • Direct labor applied • Manufacturing overhead applied • Work in process transferred to finished goods • Finished goods sold

  5. Learning Objective Explain the difference between a perpetual inventory system and aperiodic inventory system. LO1

  6. Perpetual Inventory System Periodic Inventory System The inventory account is continuously updated as purchases and sales are made. The inventory account is adjusted at the end of a reporting cycle. Inventory Methods Two accounting systems are used to record transactions involving inventory:

  7. GENERAL JOURNAL Date Description Debit Credit 2006 600,000 Inventory Accounts Payable 600,000 Perpetual Inventory System Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers. Returnsof inventory are credited to the inventory account. Discountson inventory purchases can be recorded using the gross or net method.

  8. GENERAL JOURNAL Date Description Debit Credit 2006 Accounts Receivable 820,000 820,000 Sales Cost of Goods Sold 540,000 540,000 Inventory Perpetual Inventory System Matrix, Inc. sold, on account, inventory with a retail price of $820,000 and a cost basisof $540,000, to a customer.

  9. Periodic Cost of Goods Sold Equation

  10. GENERAL JOURNAL Date Description Debit Credit 2006 600,000 Purchases Accounts Payable 600,000 Periodic Inventory System Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers. Returnsof inventory are credited to the Purchase Returns and Allowances account. Discountson inventory purchases can be recorded using the gross or net method.

  11. GENERAL JOURNAL Date Description Debit Credit 2006 Accounts Receivable 820,000 820,000 Sales Periodic Inventory System Matrix, Inc. sold on account, inventory with a retail price of $820,000 and a cost basisof $540,000, to a customer. No entry is made to record Cost of Good Sold. Assuming BeginningInventory of $120,000. A physical count of Ending Inventory showsa balance of $180,000. Let’s calculate Cost of Goods Sold atthe end of the accounting period.

  12. Adjusting entry to determine Cost of Goods Sold Periodic Inventory System

  13. Comparison of Inventory Systems

  14. Learning Objective Explain which physical quantities of goods should be included in inventory. LO2

  15. General Rule All goods owned by the company on the inventory date, regardless of their location. What is Included in Inventory? Goods in Transit Goods on Consignment Depends on FOB shipping terms.

  16. Learning Objective Determine the expenditures that shouldbe included in the cost of inventory. LO3

  17. Invoice Price Purchase Returns + Freight-in on Purchases Purchase Discounts Expenditures Included in Inventory

  18. Purchase Discounts Discount terms are 2/10, n/30. $14,000x 0.02$ 280 Partial payment not made within the discount period

  19. Net Method Using Perpetual and Periodic Matrix, Inc. purchased on account $6,000 of merchandise for resale to customers. The merchandise was purchased subject to a cash discount of 2/10, n/30. The company incurred $160 in freight-in on the merchandise. Upon inspection, the company found that $200 of merchandise was damaged and the seller agreed to accept the merchandise return and credit the account of the company. The inventory was sold for $8,300 on account. Let’s look at the journal entries under both the perpetual and periodic accounting system assuming Matrix uses the net method to record merchandise purchases.

  20. Net Method Using Perpetual and Periodic

  21. Learning Objective Differentiate between the specific identification, FIFO, LIFO, and average cost methods used to determine the cost of ending inventory and cost of goods sold. LO4

  22. Specific cost identification Average cost First-in, first-out (FIFO) Last-in, first-out (LIFO) Inventory Cost Flow Methods

  23. Items are added to inventory at cost when they are purchased. COGS for each sale is based on the specific cost of the item sold. Specific Cost Identification • The specific cost of each inventory item must be known. • By selecting specific items from inventory at the time of sale, income can be manipulated.

  24. Average Cost Method

  25. Weighted-Average Periodic System The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600frames in ending inventory. Use theperiodicweighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  26. Weighted-Average Periodic System

  27. Ending Inventory (600 units) Beginning Inventory (800 units) Purchases (1,150 units) Available for Sale (1,950 units) Goods Sold (1,350) Weighted-Average Periodic System Now, we have to assign costs to ending inventory and cost of goods sold. $47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost

  28. Weighted-Average Periodic System

  29. Moving-Average Perpetual System The following schedule shows the Frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600frames in ending inventory. Use theperpetualweighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  30. Moving-Average Perpetual System

  31. Moving-Average Perpetual System

  32. Moving-Average Perpetual System $11,600.00 ÷ (800-600+300) = $23.200

  33. Moving-Average Perpetual System $27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181

  34. Sum Moving-Average Perpetual System

  35. The cost of the oldest inventory items are charged to COGS when goods are sold. The cost of the newest inventory items remain in ending inventory. First-In, First-Out The FIFO method assumes that items are sold in the chronological order of their acquisition.

  36. First-In, First-Out Even though the periodic and the perpetual approaches differ in the timing of adjustments to inventory . . . . . . COGS and Ending Inventory Cost are the same under both approaches.

  37. FIFO - Periodic System The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600frames in ending inventory. Use theperiodicFIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  38. FIFO - Periodic System These are the 600 most recently acquired units.

  39. FIFO - Periodic System

  40. FIFO - Periodic System These are the first 1,350 units acquired.

  41. FIFO - Periodic System

  42. FIFO - Perpetual System The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600frames in ending inventory. Use theperpetualFIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  43. FIFO - Perpetual System

  44. FIFO - Perpetual System 200 The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00

  45. FIFO - Perpetual System 200 The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00 300 units from the 9/3 purchase @ $24.00

  46. FIFO - Perpetual System 200 The ending inventory on 9/10 consists of: 200 units from the 9/3 purchase @ $24.00

  47. FIFO - Perpetual System 200 The ending inventory on 9/15 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00

  48. FIFO - Perpetual System 200 The ending inventory on 9/21 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00 200 units from the 9/21 purchase @ $27.00

  49. FIFO - Perpetual System 200 The ending inventory on 9/29 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00 200 units from the 9/21 purchase @ $27.00 400 units from the 9/29 purchase @ $28.00

  50. FIFO - Perpetual System The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00 400 units from the 9/29 purchase @ $28.00.

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